An article in the March issue of Inc. magazine by veteran entrepreneur Norm Brodsky points out that fear that overtakes business owners during a recession can lead to unwise panic decisions that weaken their company in the long term.
“Fear can be a motivator, but it can also lead you into bad decisions, particularly in times like these,” Brodsky writes. “I have no doubt that a lot of business owners have spent the past couple of months implementing cost-saving plans and survival strategies that will weaken their companies and damage their long-term prospects. They've done it because they've been afraid, and fear makes us shortsighted.
“With the economy falling apart around us, we forget that recessions always end. Yes, some businesses will go under, but some companies will emerge stronger. If you want yours to be among the latter, you need to be careful about which costs you cut and which deals you offer your customers.
He makes his point by using a case study of a young woman named Lisa whose photography business had grown to four galleries in California and New Mexico. Her business had fallen sharply due to the recession, and she needed to either increase revenue by $200,000, or cut her spending for the year by that amount in order to remain stable.
Analyzing her situation, Brodsky talked her out of reducing hours at the galleries, saying that would reduce the amount of time when customers could come and purchase her work.
Rather, Brodsky recommended looking at ways that would reduce costs more appropriately and/or enhance revenues. One area of cost reduction was to try to negotiate with her landlords at the various locations to temporarily reduce her rent payments, with the shortfall being made up later on.
Brodsky advised against having a sale – i.e., reducing prices overall – since he believes in general that one should hold the line on prices during a recession, while at the same timing providing some value added to bring in new business. For example, he suggested holding a “customer appreciation week,” where Lisa could offer something extra to the people who buy her smaller, unsigned photos – for instance, a special limited edition of select photos signed by her.
Lisa also suggested she could save significantly by reducing inventory, where she said she has typically overspent.
An idea to potentially increase revenue significantly was to look for untapped markets outside her locations in the West. Brodsky suggested that the photographer expand into other areas of the country, give up some control to allow for larger commissions, and thereby potentially sharply increase business.
As this example shows, not all ideas for cost reduction are good ones – in the sense that they can actually impair the future of the business.
“At the end of the recession,” says Brodsky, “the winners will be those who have taken advantage of their most important resources -- imagination and creativity.”
Wednesday, March 25, 2009
Tuesday, March 24, 2009
Harvard Study Finds VC-Backed Failures Do Not Help the Entrepreneurs To Future Success
Research by a group of Harvard Business School professors suggests that, contrary to conventional wisdom, the failure of a venture-backed business does not equip the entrepreneur with any greater capability for a future successful venture than a totally inexperienced entrepreneur, according to an article in The New York Times (3-22-09).
The study found that "when it comes to venture-backed entrepreneurship, the only experience that counts is success," the article states.
"The data are absolutely clear," said Paul A. Gompers, a professor at HBS and one of the study's authors. "Does failure breed new knowledge or experience that can be leveraged into performance the second time around?" In some cases, yes, he says, but overall, "We found there is no benefit in terms of performance."
The study looked at several thousand VC-backed companies from 1986-2003. Gompers and his HBS co-authors, Anna Kovner, Josh Lerner and David S. Scharfstein, found that first-time entrepreneurs who received VC funding had a 22% chance of success -- defined as going public or filing to go public. Gompers said the results were similar when using other measures, e.g., acquisition or merger.
Already-successful entrepreneurs were far more likely to succeed again, the study showed. Their success rate was 34%. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers, 23%.
"For the average entrepreneur who failed, no learning happened," Gompers said.
Some entrepreneurs and VCs disputed this conclusion. For example, Mark Pincus, founder and CEO of Zynga, San Francisco, an online-game developer, said that he received funding for Zynga in part because he founded two successful companies prior to a failed venture that preceded the formation of Zynga.
VCs expect entrepreneurs to take risks, and both VCs and entrepreneurs expect occasional failures, Pincus said. "As an entrepreneur, you have to get used to failure. It is just part of the path to success," he said.
Although the study found that in general, failures are not a particularly effective teacher of entrepreneurship, Gompers said that "absolutely some entrepreneurs can learn" from them.
He also believes that Silicon Valley's deep-rooted belief in the value of failure is due to "attribution bias" -- people generalizing from anecdotal success-after-failure stories.
The study found that "when it comes to venture-backed entrepreneurship, the only experience that counts is success," the article states.
"The data are absolutely clear," said Paul A. Gompers, a professor at HBS and one of the study's authors. "Does failure breed new knowledge or experience that can be leveraged into performance the second time around?" In some cases, yes, he says, but overall, "We found there is no benefit in terms of performance."
The study looked at several thousand VC-backed companies from 1986-2003. Gompers and his HBS co-authors, Anna Kovner, Josh Lerner and David S. Scharfstein, found that first-time entrepreneurs who received VC funding had a 22% chance of success -- defined as going public or filing to go public. Gompers said the results were similar when using other measures, e.g., acquisition or merger.
Already-successful entrepreneurs were far more likely to succeed again, the study showed. Their success rate was 34%. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers, 23%.
"For the average entrepreneur who failed, no learning happened," Gompers said.
Some entrepreneurs and VCs disputed this conclusion. For example, Mark Pincus, founder and CEO of Zynga, San Francisco, an online-game developer, said that he received funding for Zynga in part because he founded two successful companies prior to a failed venture that preceded the formation of Zynga.
VCs expect entrepreneurs to take risks, and both VCs and entrepreneurs expect occasional failures, Pincus said. "As an entrepreneur, you have to get used to failure. It is just part of the path to success," he said.
Although the study found that in general, failures are not a particularly effective teacher of entrepreneurship, Gompers said that "absolutely some entrepreneurs can learn" from them.
He also believes that Silicon Valley's deep-rooted belief in the value of failure is due to "attribution bias" -- people generalizing from anecdotal success-after-failure stories.
Tuesday, March 17, 2009
Search Funds are Growing In Popularity As a Way to Raise the Odds of Building a Successful Business
"While most people have never heard of them, search funds are attracting increasing attention as a way for small businesses to beat the usual odds of success, even in the midst of a deepening recession," according to an article in The New York Times ("Paying Entrepreneurs to Find the Right Business," March 12, 2009), from which this posting is abstracted.
"This is the way a search fund typically works: One or two ambitious graduates of a top-tier business school, who want to run their own business but recognize they lack practical experience, offer themselves as fledgling entrepreneurs who can make some tough-minded investors a lot of money.
"These investors put up about half a million dollars for the pair to spend up to two years scouring the marketplace for a promising business with $10 million to $30 million in revenue. If satisfied with the choice, the investors help finance the acquisition of the business, join its board and give their young partners a crash course in hands-on management. If all works out, the venture grows and makes everybody richer.
"H. Irving Grousbeck, co-founder of Continental Cablevision (later Media One) and now a consulting professor of business at Stanford University, helped originate the business model a quarter of a century ago and has been studying it ever since.
"Grousbeck says studies by the Center for Entrepreneurial Studies at Stanford, which he co-directs, show average annual returns by search funds to their original investors of well over 30 percent.
"The results are skewed by the big winners, which constitute about a fourth of the total. Another fourth fold without making a purchase, a fourth lose money for their investors and a fourth provide a middling return, according to Mr. Southern, the Boston investor. Still, taken as a whole, search funds can be a winning proposition.
"The funds do have drawbacks, of course. The same recession that has attracted search fund buyers has scared off sellers, for example, Mr. Grousbeck said.
Moreover, major successes are rare. However, one major success is Asurion, which was built from a $6 million roadside assistance company with 45 employees into the nation’s largest provider of insurance products to cellphone companies.
"Asurion provides a case study of the power of the search fund model in the right circumstances.
The founders, who had studied under Mr. Grousbeck at Stanford, said they liked Roadside Rescue (the predecessor company) because it was not a towing company. Instead, it sold roadside assistance insurance through local wireless carriers to their users. The venture grew by 50 to 100 percent a year in its first four years.
"Then the two men had an epiphany: they were not in the roadside-assistance business; they were in the cellphone services business. In 1999 they expanded into insurance for loss or damage to cellphones. After making three major acquisitions in recent years, Asurion, based in San Mateo, Calif., has grown into a $2.5 billion company with 10,000 employees, more than 70 million wireless customers and a growing presence in Asia.
Jim Southern, a Boston investor, said his search funds had generated 14 times the capital he placed in 20 companies over an average holding period of eight years
He says that "more business school graduates are being drawn to search funds, in part because of Asurion’s success and in part because the recession has diminished prospects on Wall Street and in corporate America. Nearly 25 would-be search fund entrepreneurs have approached him since November alone, he said, compared with fewer than 10 in a full year in the past. He plans to back nine funds this year, the same as in 2008 and 2007 but significantly more than the one or two a year he helped finance before that.
"Mr. Grousbeck, the Stanford professor who nurtured the first fund in 1984 when he was teaching at Harvard, says the business model has spread to Europe, Latin America, Asia and even South Africa, if only by a trickle.
"Still, search funds occupy a tiny niche of the investment world. Mr. Southern estimates that only 160 or so have been created, all looking for companies with less than $50 million in revenue. He estimated that about 60 search fund companies were active today.
"Even so, Mr. Grousbeck said, investors who back a portfolio of search funds stand a good chance of beating the returns in other markets. “I can’t tell you how many investors have asked me, ‘Why should I pay somebody to hunt for a company when entrepreneurs are knocking on my door all the time to invest in theirs?’ ” he said. “I tell them, ‘You’d be taking a very small risk for the chance to ride the coattails of some very bright and talented people.’ ”
"This is the way a search fund typically works: One or two ambitious graduates of a top-tier business school, who want to run their own business but recognize they lack practical experience, offer themselves as fledgling entrepreneurs who can make some tough-minded investors a lot of money.
"These investors put up about half a million dollars for the pair to spend up to two years scouring the marketplace for a promising business with $10 million to $30 million in revenue. If satisfied with the choice, the investors help finance the acquisition of the business, join its board and give their young partners a crash course in hands-on management. If all works out, the venture grows and makes everybody richer.
"H. Irving Grousbeck, co-founder of Continental Cablevision (later Media One) and now a consulting professor of business at Stanford University, helped originate the business model a quarter of a century ago and has been studying it ever since.
"Grousbeck says studies by the Center for Entrepreneurial Studies at Stanford, which he co-directs, show average annual returns by search funds to their original investors of well over 30 percent.
"The results are skewed by the big winners, which constitute about a fourth of the total. Another fourth fold without making a purchase, a fourth lose money for their investors and a fourth provide a middling return, according to Mr. Southern, the Boston investor. Still, taken as a whole, search funds can be a winning proposition.
"The funds do have drawbacks, of course. The same recession that has attracted search fund buyers has scared off sellers, for example, Mr. Grousbeck said.
Moreover, major successes are rare. However, one major success is Asurion, which was built from a $6 million roadside assistance company with 45 employees into the nation’s largest provider of insurance products to cellphone companies.
"Asurion provides a case study of the power of the search fund model in the right circumstances.
The founders, who had studied under Mr. Grousbeck at Stanford, said they liked Roadside Rescue (the predecessor company) because it was not a towing company. Instead, it sold roadside assistance insurance through local wireless carriers to their users. The venture grew by 50 to 100 percent a year in its first four years.
"Then the two men had an epiphany: they were not in the roadside-assistance business; they were in the cellphone services business. In 1999 they expanded into insurance for loss or damage to cellphones. After making three major acquisitions in recent years, Asurion, based in San Mateo, Calif., has grown into a $2.5 billion company with 10,000 employees, more than 70 million wireless customers and a growing presence in Asia.
Jim Southern, a Boston investor, said his search funds had generated 14 times the capital he placed in 20 companies over an average holding period of eight years
He says that "more business school graduates are being drawn to search funds, in part because of Asurion’s success and in part because the recession has diminished prospects on Wall Street and in corporate America. Nearly 25 would-be search fund entrepreneurs have approached him since November alone, he said, compared with fewer than 10 in a full year in the past. He plans to back nine funds this year, the same as in 2008 and 2007 but significantly more than the one or two a year he helped finance before that.
"Mr. Grousbeck, the Stanford professor who nurtured the first fund in 1984 when he was teaching at Harvard, says the business model has spread to Europe, Latin America, Asia and even South Africa, if only by a trickle.
"Still, search funds occupy a tiny niche of the investment world. Mr. Southern estimates that only 160 or so have been created, all looking for companies with less than $50 million in revenue. He estimated that about 60 search fund companies were active today.
"Even so, Mr. Grousbeck said, investors who back a portfolio of search funds stand a good chance of beating the returns in other markets. “I can’t tell you how many investors have asked me, ‘Why should I pay somebody to hunt for a company when entrepreneurs are knocking on my door all the time to invest in theirs?’ ” he said. “I tell them, ‘You’d be taking a very small risk for the chance to ride the coattails of some very bright and talented people.’ ”
Monday, March 16, 2009
Developing Leaders Rather Than Managers May Be the New Objective of MBA Programs
Many MBA programs today are under intense scrutiny, with the objective of re-emphasizing leadership and ethical behavior, and de-emphasizing single-minded, aggressive pursuit of maximizing shareholder value at all cost.
With the turmoil of the financial crisis impacting businesses at all levels of their organizations, and with the exposure of so much wrongdoing and unethical behavior, many of the nation's business school programs are undergoing a significant evaluation -- both internally and by outside parties.
An article in The New York Times (March 15), "Is It Time to Retrain B-Schools?", citing the recent problems in the financial services industry, says that "analysts, and even educators themselves, are wondering if the way business students are taught may have contributed to the most serious economic crisis in decades."
“It is so obvious that something big has failed,” said Ángel Cabrera, dean of the Thunderbird School of Global Management in Glendale, Ariz. “We can look the other way, but come on. The C.E.O.’s of those companies, those are people we used to brag about. We cannot say, ‘Well, it wasn’t our fault’ when there is such a systemic, widespread failure of leadership.”
"Critics of business education have many complaints," the article states. "Some say the schools have become too scientific, too detached from real-world issues. Others say students are taught to come up with hasty solutions to complicated problems. Another group contends that schools give students a limited and distorted view of their role — that they graduate with a focus on maximizing shareholder value and only a limited understanding of ethical and social considerations essential to business leadership.
“Instead of being viewed as long-term economic stewards, managers came to be seen mainly as the agents of the owners — the shareholders — and responsible for maximizing shareholder wealth, said Rakesh Khurana, a professor at Harvard Business School.
"There is a need to broaden from the analytical focus of M.B.A. programs for more emphasis on skills and a sense of purpose and identity,” said David A. Garvin, a professor of business administration and one of the project’s authors.
"Indeed, students themselves may welcome an emphasis on character skills. In surveys that the Aspen Institute regularly conducts, M.B.A. candidates say they actually become less confident during their time in business school that they will be able to resolve ethical quandaries in the workplace."
A growing number of business schools are trying new approaches — and many are finding valuable lessons to draw from the economic crisis, the article states.
At the Yale School of Management, for example, the new dean, Sharon M. Oster, has called for a renewed focus on the social value of management. “Business creates value in terms of services and products,” she said. “That’s what business delivers, just like medicine delivers a healthy person.”
Professionalism is hardly a panacea, the Times article states. "No one would argue that lawyers, doctors and accountants are immune from wrongdoing or poor judgment, and they have long been taking certification exams and promising to act ethically. It is also unclear who would monitor continuing education and what kind of certification would be required."
"But surveys of business students show that they are starting to focus more on social issues and ethics, and that this could intensify talk of making managers’ obligations to society more explicit."
“The challenge for a lot of business schools is how to develop leaders and not managers,” said James Tran, a candidate for an M.B.A. and a master’s in public administration at Harvard. Many of the top schools are moving in that direction, he said, but “I don’t think they have actually figured out how to do that in the most effective way.”
With the turmoil of the financial crisis impacting businesses at all levels of their organizations, and with the exposure of so much wrongdoing and unethical behavior, many of the nation's business school programs are undergoing a significant evaluation -- both internally and by outside parties.
An article in The New York Times (March 15), "Is It Time to Retrain B-Schools?", citing the recent problems in the financial services industry, says that "analysts, and even educators themselves, are wondering if the way business students are taught may have contributed to the most serious economic crisis in decades."
“It is so obvious that something big has failed,” said Ángel Cabrera, dean of the Thunderbird School of Global Management in Glendale, Ariz. “We can look the other way, but come on. The C.E.O.’s of those companies, those are people we used to brag about. We cannot say, ‘Well, it wasn’t our fault’ when there is such a systemic, widespread failure of leadership.”
"Critics of business education have many complaints," the article states. "Some say the schools have become too scientific, too detached from real-world issues. Others say students are taught to come up with hasty solutions to complicated problems. Another group contends that schools give students a limited and distorted view of their role — that they graduate with a focus on maximizing shareholder value and only a limited understanding of ethical and social considerations essential to business leadership.
“Instead of being viewed as long-term economic stewards, managers came to be seen mainly as the agents of the owners — the shareholders — and responsible for maximizing shareholder wealth, said Rakesh Khurana, a professor at Harvard Business School.
"There is a need to broaden from the analytical focus of M.B.A. programs for more emphasis on skills and a sense of purpose and identity,” said David A. Garvin, a professor of business administration and one of the project’s authors.
"Indeed, students themselves may welcome an emphasis on character skills. In surveys that the Aspen Institute regularly conducts, M.B.A. candidates say they actually become less confident during their time in business school that they will be able to resolve ethical quandaries in the workplace."
A growing number of business schools are trying new approaches — and many are finding valuable lessons to draw from the economic crisis, the article states.
At the Yale School of Management, for example, the new dean, Sharon M. Oster, has called for a renewed focus on the social value of management. “Business creates value in terms of services and products,” she said. “That’s what business delivers, just like medicine delivers a healthy person.”
Professionalism is hardly a panacea, the Times article states. "No one would argue that lawyers, doctors and accountants are immune from wrongdoing or poor judgment, and they have long been taking certification exams and promising to act ethically. It is also unclear who would monitor continuing education and what kind of certification would be required."
"But surveys of business students show that they are starting to focus more on social issues and ethics, and that this could intensify talk of making managers’ obligations to society more explicit."
“The challenge for a lot of business schools is how to develop leaders and not managers,” said James Tran, a candidate for an M.B.A. and a master’s in public administration at Harvard. Many of the top schools are moving in that direction, he said, but “I don’t think they have actually figured out how to do that in the most effective way.”
Wednesday, March 11, 2009
Seminar on Storefront Design Provides Food for Thought
The unexpected happens a lot to me. On Tuesday, I attended a business event that I was not sure would be right for me -- but it turned out to be an excellent meeting in terms of both learning something new and developing new business contacts.
The event was part of the new Sunrise Seminar Series of breakfast meetings presented by the Yonkers (NY) Downtown/Waterfront Business Improvement District (Yonkers Downtown BID). The topic was "Curb Appeal," and the broad subject was how to add excitement to store window displays to bring more traffic into the store.
Now, this is not my area of expertise, nor my usual area of interest. But at the suggestion of one of my business associates, I attended and was very pleasantly surprised.
Two experts in the field of storefront design provided guidelines for good design that can help to draw customers into a store, and illustrated these guidelines by showing pictures of both well-designed and poorly-designed storefronts.
The speakers were Maureen Farrell, project manager and treasurer of the New York City Chapter of the Retail Design Institute; and Nicole Innis, of Yonkers-based Innis Designs, which specializes in designing eco-friendly interiors and spaces for retailers, other businesses and residences.
Both presentations were much more interesting than I had expected. Ms. Innis provided 10 tips for better storefront design, while the focal point of Ms. Farrell's presentation were pictures of dozens of storefronts that illustrated both the do's and don't's of designing appealing window displays.
The presentations made me think about things that I normally do not -- e.g., how the design of a business location impacts our desire to enter the premises and make a purchase.
An added plus for me was the opportunity to network with Westchester-based businesspeople, in a congenial atmosphere.
Finally, the venue for the seminar -- the Larkin Library in downtown Yonkers -- is an excellent location. The library offers a scenic view of the Hudson River, adding to the enjoyment of the meeting.
The bottom line for me: Take a chance on a meeting or event -- even if it doesn't seem right up your alley. You may be pleasantly surprised.
The event was part of the new Sunrise Seminar Series of breakfast meetings presented by the Yonkers (NY) Downtown/Waterfront Business Improvement District (Yonkers Downtown BID). The topic was "Curb Appeal," and the broad subject was how to add excitement to store window displays to bring more traffic into the store.
Now, this is not my area of expertise, nor my usual area of interest. But at the suggestion of one of my business associates, I attended and was very pleasantly surprised.
Two experts in the field of storefront design provided guidelines for good design that can help to draw customers into a store, and illustrated these guidelines by showing pictures of both well-designed and poorly-designed storefronts.
The speakers were Maureen Farrell, project manager and treasurer of the New York City Chapter of the Retail Design Institute; and Nicole Innis, of Yonkers-based Innis Designs, which specializes in designing eco-friendly interiors and spaces for retailers, other businesses and residences.
Both presentations were much more interesting than I had expected. Ms. Innis provided 10 tips for better storefront design, while the focal point of Ms. Farrell's presentation were pictures of dozens of storefronts that illustrated both the do's and don't's of designing appealing window displays.
The presentations made me think about things that I normally do not -- e.g., how the design of a business location impacts our desire to enter the premises and make a purchase.
An added plus for me was the opportunity to network with Westchester-based businesspeople, in a congenial atmosphere.
Finally, the venue for the seminar -- the Larkin Library in downtown Yonkers -- is an excellent location. The library offers a scenic view of the Hudson River, adding to the enjoyment of the meeting.
The bottom line for me: Take a chance on a meeting or event -- even if it doesn't seem right up your alley. You may be pleasantly surprised.
Subscribe to:
Posts (Atom)